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Chapter 5, Pg 24

A

Archit Bansal

Member
On going through the example and question on the said page, we have forward exchange rate, F = 1.5, force of interest in UK = 4%pa, force of interest in US = 2%pa. Exchange has to take place in 90 days and we are to find Spot rate S.

Then as per the formula, S= 1.5 *[exp(0.02*90/365)]/[exp(0.04*90/365)] which should come out to 1.4926 but the result in solution is 1.5074

Kindly clarify.
 
Archit Bansal said:
On going through the example and question on the said page, we have forward exchange rate, F = 1.5, force of interest in UK = 4%pa, force of interest in US = 2%pa. Exchange has to take place in 90 days and we are to find Spot rate S.

Then as per the formula, S= 1.5 *[exp(0.02*90/365)]/[exp(0.04*90/365)] which should come out to 1.4926 but the result in solution is 1.5074

Kindly clarify.
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Hi, The version I am looking at has the factor the other way round from your text above. It has the 4% on the top and the 2% on the bottom. If your notes have the factor the way you have quoted above, then please confirm this and we will investigate further.
 
Colin McKee said:
Hi, The version I am looking at has the factor the other way round from your text above. It has the 4% on the top and the 2% on the bottom. If your notes have the factor the way you have quoted above, then please confirm this and we will investigate further.
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New
Can you please validate the result in the material through you own calculation? And it would great if you can share a screenshot of the solution in your material.

Thanks for replying
 
I would be happy to do so. However I am still confused about your post. Do your notes show the equation you have added in the post? namely S= 1.5 *[exp(0.02*90/365)]/[exp(0.04*90/365)]. Or do your notes show the opposite, with the 0.04 on the top line and the 0.02 on the bottom line as appears in my version of the notes? thanks
 
Colin McKee said:
I would be happy to do so. However I am still confused about your post. Do your notes show the equation you have added in the post? namely S= 1.5 *[exp(0.02*90/365)]/[exp(0.04*90/365)]. Or do your notes show the opposite, with the 0.04 on the top line and the 0.02 on the bottom line as appears in my version of the notes? thanks
Click to expand...
It shows the opposite, with 0.04 on the top and 0.02 on the bottom; F on one side and S and the forces of interest on the other. I have just reciprocated it to show the final computation of S.
 
Ahh I see. I can see what you mean - I didnt see that you had switched the S and F around in your post from the formula in the course notes. Normally we are given a spot rate S and asked to calculate a forward F. But in this ActEd example we are given the forward and asked to find the spot. I will sort out a better explanation than the one in the ActEd course notes and place it in a "corrections" doc on the ActEd website. In fact the result of the spot rate calculation is correct, but the way we have reached the result is wrong.
 
Colin McKee said:
Ahh I see. I can see what you mean - I didnt see that you had switched the S and F around in your post from the formula in the course notes. Normally we are given a spot rate S and asked to calculate a forward F. But in this ActEd example we are given the forward and asked to find the spot. I agree with you that 1.5 = S exp(0.04*90/365) / exp(0.02*90/365) seems to solve for S = 1.493. I will get a corrections doc on the website to amend this, but as it stands I think the ActEd formula has been incorrectly solved.
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Thanks for clarifying
 
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